US Stocks Negatively Reverse After China’s Currency Becomes More “Flexible”

Monday, June 21, 2010
Stock Market Rally:

The major averages negatively reversed (opened higher and closed lower) after The People’s Bank of China pledged on June 19 to make the yuan more flexible. As expected, volume totals were reported lower on both major exchanges due to Friday’s quadruple witching day. Decliners led advancers by a 22-to-17 ratio on the NYSE and by a 2-to-1 ratio on the Nasdaq exchange. There were 50 high-ranked companies from the Leaders List that made a new 52-week high and appeared on the BreakOuts Page, higher than the 33 issues that appeared on the prior session.  New 52-week highs outnumbered new 52-week lows on the NYSE and on the Nasdaq exchange.

China Allows Its Yuan To Be More “Flexible”:

Overnight, Asian and European equities soared after China said it will allow its currency, the yuan, to be more flexible against the US dollar. Since the 2008 financial crisis, the yuan has been artificially pegged to the US dollar to protect Chinese exporters. During that time, a slew of Western governments, including the US, have pressured Beijing to remove the onerous peg but each time Beijing has dismissed their requests. It is important to note that China’s economy is experiencing explosive growth and Beijing has taken several key measures in recent years to curb that robust growth. Allowing the yuan to be more flexible is simply another calculated measure to achieving that goal.  

Yuan Sparks Global Rally But US Stocks End Lower:

The news sent global stocks up for a 10th consecutive day which helped send the MSCI World Index to its longest rally in nearly a year. Gold continued its recent run and hit a fresh all-time high of $1,266.50 an ounce before backing off and closing lower on the day. A slew of high ranked stocks have triggered fresh technical buy signals since last Tuesday’s follow-through day (FTD) which bodes well for this nascent rally. Remember that now that a proper follow-through day has emerged the window will remain open for the next 13 weeks to begin buying high ranked stocks as they trigger fresh technical buy signals.

Market Action- Confirmed Rally:

It is also important to note that it was encouraging to also see the Dow Jones Industrial Average and the benchmark S&P 500 Index rally above their respective 200-day moving average (DMA) lines last week. The 200 DMA line should now act as support as this market continues advancing, while any reversal below that key technical level would be a worrisome sign.  

Remember to remain very selective because all of the major averages are still trading below their downward sloping 50 DMA lines (which is the next area of resistance). It is also important to note that approximately 75% of FTDs lead to new sustained rallies, while 25% fail. In addition, every major rally in market history has begun with a FTD, but not every FTD leads to a new rally. Trade accordingly.

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